Must-knows of KiwiSaver

Fund types

We’ve grouped KiwiSaver funds based on the riskiness of their investments. The value of riskier funds tends to rise and fall more, but over long periods those funds usually grow more, too.

The five types of funds

When you put money into KiwiSaver, managers invest it in income or growth assets (or both). Income assets (cash and bonds) pay interest and – unless there is a default – generally the fund gets its money back at the end of the term. Growth assets (shares and property) pay dividends or rent, and you also gain when the value of these assets grows. But the value of growth assets is likely to fall in some years. Over the long term, growth assets usually bring higher returns on average than income assets, but there are more ups and downs along the way. We’ve grouped KiwiSaver funds depending on the amount of growth assets they held in the last reporting period.

Defensive funds hold 0% to 9.9% in growth assets. These are generally suitable if you:

Don’t want your KiwiSaver account to ever go down (although there are no guarantees), even though that means your account almost certainly won’t grow as fast, over the long term, as accounts in riskier funds

Expect to spend your KiwiSaver money in the next three years

Conservative funds hold 10% to 34.9% in growth assets. These are generally suitable if you:

Are willing to take on some ups and downs in value, and are seeking average long-term returns a bit higher than in a defensive fund but probably not as high as in riskier funds

Expect to spend your KiwiSaver money in the next two to six years

Balanced funds hold 35% to 62.9% in growth assets. These are generally suitable if you:

Are middle of the road, comfortable with seeing your account value sometimes fall a little and seeking mid-range long-term returns

Don’t expect to spend your KiwiSaver money within the next 5 to 12 years

Growth funds hold 63% to 89.9% in growth assets. These are generally suitable if you:

Are looking for fairly high growth over the long term, and won’t want to switch to a lower-risk fund whenever you see your account balance fall quite a lot

Are intending to leave your money in KiwiSaver for at least 10 years

Aggressive funds hold 90% to 100% in growth assets. These are generally suitable if you:

Are looking for strong long-term growth, knowing you will stick with your fund even when your balance falls fast

Are intending to leave your money in KiwiSaver for at least 10 years

Things to think about

If you would panic if your KiwiSaver account balance fell, a defensive fund may suit you best. Note, though, that in a defensive fund there’s a different type of risk – that your account sometimes won’t grow as fast as inflation, so the buying power of your savings could fall over time. In a defensive fund you may need to save more each year to reach a savings goal than you would in a higher-risk fund.

When choosing which type of fund is best for you, always take into account any other significant investments you have. For example, if you have lots of low-risk bank term deposits, you may want a higher-risk KiwiSaver fund. Or if you have rental property, in which the risk level varies widely, you may want a higher or lower-risk KiwiSaver fund. If you’re not sure, you might want to seek help from an Authorised Financial Adviser.

Conservative and balanced funds (and to a lesser extent growth funds) often hold lots of long-term bonds, which carry some risk. Bond issuers may not pay back the money. Also, when interest rates rise, the value of bonds goes down over the short term. For example, if an existing bond is paying 6% interest and new bonds are paying 8%, the 6% bond becomes unattractive and its value falls for a period, although in time it will recover. This can lead to negative returns over the short term in funds holding bonds.

Some KiwiSaver funds have names that don’t match our categories of fund types. For example, XYZ KiwiSaver’s Defensive Fund may hold more than 10% growth assets, so we categorise it as a conservative fund. We suggest you think of it as a conservative fund.

Because some fund managers vary their investments depending on market conditions, their funds may move from one category to another. For example, the manager of a growth fund may reduce its share holdings for a period, so we'll move that fund into the balanced fund category.

Though you can belong to only one KiwiSaver scheme at a time, most providers will let you invest in more than one of their funds. Close to retirement you might, for example, put money you plan to spend in the next few years in a conservative or defensive fund, and money you plan to spend later in a riskier fund. Choose a provider that offers the flexibility you want.

In our five types, we don’t include KiwiSaver offerings in which the percentages of shares and property decrease as you get older. These are sometimes called Life Steps, Life Stages, Age Steps or similar. They can be a good KiwiSaver choice, but we can’t categorise them because the investments you hold will vary depending on your age.

Fees

The fees shown are those charged by providers for the year ended 31 March 2017 on the average KiwiSaver balance on 31 March 2017. Over the years, fees have a big effect on how fast your savings accumulate.

KiwiSaver fees come in two forms

A fixed membership fee. Flat fees in KiwiSaver range from $0 to $60 a year, and on average $32.

A percentage of your account balance. Percentage fees tend to be higher in riskier funds – although that’s not always the case.

Which matters more?

When you first join KiwiSaver, the fixed fees have a big effect. For example, if you have $3,000 in your account and your return is $150 a year, whether you subtract $0 or $60 from that makes a big difference.

But by the time you have $100,000 in your account, your return might be $5,000 a year. It won’t matter much whether you subtract $0 or $60 from that.

The percentage fee usually has a bigger effect overall, especially if you save over a long period.

Let's look at a typical young employee in KiwiSaver for 45 years. If everything else is equal, their savings might total:

$398,500 if their providers percentage fees are 0.5% a year.

$360,400 if the percentage fees are 1.0% a year.

That’s a big difference.

If we look at a typical older employee who is in KiwiSaver for 10 years instead of 45 years, their savings might total:

$27,400 if their providers percentage fees are 0.5% a year.

$26,800 if the percentage fees are 1.0% a year.

That's not such a big difference, but still worth noting.

Things to think about

Providers may change their fees over time.

KiwiSaver fees are one area where it’s not necessarily true that ‘you get what you pay for’. Higher fees don’t necessarily mean higher returns or better service.

When fund managers buy and sell shares, and sometimes other assets, they manage in either an active or a passive way. Active managers usually trade shares quite frequently, looking to enhance their returns, while passive managers simply buy and hold a range of shares – often the shares in a market index such as the NZX 50. (Funds based on an index are called index funds.) Active management costs more, so the fees tend to be higher. Experts debate whether active or passive is better. Sorted’s KiwiSaver fees calculator tells you which funds are active and which are passive.

Services

When it comes to telling you how fast your KiwiSaver account is growing, helping you decide which fund to be in, or offering alternatives or assistance, some providers give you more of a hand than others.

We regularly survey providers on how many services they offer in three categories. Here are the categories, with some examples of what’s included in each:

Help with investment options: online calculators, information on the provider’s website for people at different life stages or with different attitudes towards risk

Communications to members: flexibility on how you receive balance and other information and how often you receive it, call centre availability, newsletters

Extra services: help with maximising tax credits, help with transferring Australian super and advice before and during retirement

So this rating is more about the quantity than the quality of services. We’ve assigned points for the various services offered and scored each provider.

If a particular service matters to you, check whether your provider offers it by reading their website, or phoning or emailing them.

Returns

The finder shows a fund’s returns – after fees and tax – between 1 April 2011 and 31 December 2016. Note that past performance won’t necessarily continue. In fact, in some situations previous good performers tend to do worse than average later on.

Why five years?

Short-term returns can be all over the place. When it comes to judging performance, the longer the period the better (within reason). Our choice of five years means we can include most KiwiSaver funds, although we have to exclude a few newer funds until they have a five-year record.

Even with five years of information, no one can be sure that any trend is likely to continue. If good performance is partly the result of low fees, that may continue as long as the fees stay low.

But if high returns are the result of investment strategy, research shows there is some tendency for previous good performers to do worse than average in the future. This may be because winning funds tend to be riskier, so they have big ups and big downs.

Don’t choose a fund based just on past performance.

Taxes

The calculations here use the top rate for most KiwiSaver savings, which is 28%. If your total taxable income from other sources was $48,000 or less in either or both of the last two years, you are quite likely to pay less tax on your KiwiSaver returns, so they will be somewhat higher. However, this won’t affect comparisons from one fund to another.

Things to think about

There’s a wide range of growth assets within the conservative, balanced and growth fund types. For example, Balanced Fund A might hold just 35% in growth assets, while Balanced Fund B holds 62%. In periods when growth assets perform well, returns for Fund B are likely to be higher just because of the larger holding of growth assets. But if growth assets then perform badly, Fund B is likely to do worse than Fund A. When comparing the returns of two funds within a fund type, take into account what each fund holds.

Ethical funds

“Ethical” will mean different things to different people, but there are a number of KiwiSaver funds that filter out certain “undesirable” investments.

The following schemes have a framework in place to filter out investments that could be considered unethical, such as tobacco or weapons:

Growth

Aggressive

Things to think about:

Keep in mind that “ethical investment” is just one of the criteria you need to consider when choosing your fund.

The fund you’re in also needs to be the right level of risk for you, have the level of services you want, with fees that seem reasonable. It can’t have consistently underperformed, either – which could be a sign of poor management.

You don’t want to end up in the “ethically perfect” fund that doesn’t suit your other needs and fit all the criteria.

Switching

There are two ways of switching with KiwiSaver: staying with your provider but moving to one of their other funds, or moving to a new provider. It’s easy to switch but it’s not always wise.

Moving to a different fund with your provider

Good reasons to switch funds within the same provider

You find your fund’s ups and downs worry you too much, so you move to a lower-risk fund. (See the first item in ‘Things to think about’ below.)

You decide you can tolerate more ups and downs, and you want the possible higher returns of a riskier fund – although you know there are no guarantees.

You’re getting closer to the time you plan to start spending your KiwiSaver money, on a first home or in retirement. So you move – perhaps in several steps – to a lower-risk fund, to reduce the likelihood that your balance will drop right before you spend the money. This is particularly important for first-home buyers.

Bad reason

You’ve read that another of your provider’s funds has been making higher returns than your fund.

How to move to a different fund

Ask your provider or check on their website. Most providers don’t charge for this, and it should be simple. Some will let you do it online, but others require you to fill out a form and send it in.

Moving to a new provider

Good reasons to switch provider

You’ve found that the new provider charges lower fees on funds with the same level of risk.

You can’t understand your current provider’s communications, so you move to a provider that communicates well.

You think the new provider offers better service or investment alternatives than your current provider.

You’ve found that your current provider consistently, over long periods, makes returns well below average. But take care! Don’t choose a new provider mainly by their high returns – which may not continue – but by their investment options, fees and service.

Bad reasons

You’ve read that the new provider’s funds have been making higher returns than your fund – especially if it’s just short-term returns.

A new provider has been recommended to you, but the recommendation came from someone who is rewarded if you transfer. Ask questions about this.

How to move to a new provider

Complete a membership form for the new provider. They will tell Inland Revenue and arrange for your money to be transferred. The process usually takes 10 to 35 days.

Some providers charge a transfer fee to move out of their scheme. They are: Aon New Zealand, $35; Grosvenor Investment Management, $30; NZ Funds Management, $38; Staples Rodway, $25; Taupo Moana Iwisaver, $35; and SuperLife, $100. These providers say it’s fairer to charge those who require the switching service, and that it allows them to keep other fees lower.

Things to think about

If you find yourself switching funds or providers more often than every few years, question your reasons. Are you sure you’re not just chasing high past returns? You may be chasing something long gone.

Most providers will let you invest in more than one of their funds. Let’s say your provider does, and you have decided to move to a lower risk fund – perhaps because you can’t cope with a recent downturn in your current fund, or because you’re getting nearer to the time you plan to spend the money. One good approach is to leave your savings in the current fund, but ask for new contributions to go into the new fund. Over the next few years you might gradually transfer all your money to the new fund or leave it where it is. By not quitting the more volatile fund when it may be at a particularly low point, you will give it a chance to recover!

If you are applying for a mortgage or other loan, the lender may ask you to switch to their KiwiSaver scheme. It’s unwise to do that without first checking whether the new scheme’s fees, service and investment options suit you as well as your current scheme does. A familiar brand is not a good reason to shift funds.

Check before switching to what you think is a lower-risk fund that it’s not normally higher risk. We’ve categorised funds according to the actual assets they held in the latest period. This can be different from their target asset allocation – how many bonds, shares and so on they aim to hold over the long term. Some fund managers vary their investments widely, and may reduce the risk in a higher-risk fund for short periods. One sign of this is the word growth or aggressive in the fund name.

For the same reason, a higher-risk fund may normally be in a lower-risk category. Again, look for a clue in the name of the fund, read the provider’s description on our fund details page, or ask the provider for information.

Considering moving out of a defensive fund?

Any type of fund you move into is more likely to report losses in some periods. However, long-term average returns are likely to be higher.

Considering moving out of a conservative fund?

If you move to a defensive fund, you will probably have fewer ups and downs in value, but your long-term average returns are likely to be lower. If you move to a higher-risk fund, there’s probably a bigger chance of losses in some years, but likely higher long-term growth.

Considering moving out of a balanced fund?

If you move to a conservative or defensive fund, you will probably have fewer ups and downs in value, but your long-term average returns are likely to be lower. If you move to a higher-risk fund, there’s probably a bigger chance of losses in some years, but likely higher long-term growth.

Considering moving out of a growth fund?

If you move to a lower-risk fund, you will probably have fewer ups and downs in value, but your long-term average returns are likely to be lower. If you move to an aggressive fund, there’s probably a bigger chance of losses in some years, but likely higher long-term growth.

Considering moving out of an aggressive fund?

Any fund you move to will probably have fewer ups and downs in value, but your long-term average returns are likely to be lower.